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Living on the Edge: Health Care Expenses Strain Family Budgets

Affordability of medical care is a central focus of health care reform efforts.
As health care costs continue to increase and the economy declines sharply,
there is very little cushion in family budgets for health care costs, even for
families with insurance coverage. Financial pressures on families from medical
bills increase sharply when out-of-pocket spending for health care services
exceeds 2.5 percent of family income, according to a new national study by the
Center for Studying Health System Change (HSC). Low-income families and people
in poor health experience financial pressures at even lower levels of spending,
largely because they have already accumulated large medical debts they are unable
to pay off. Many Californians also incur substantial burdens from health care
expenses, although the rate of medical bill problems is somewhat lower in California
compared with the overall United States. Extended interviews with a select number
of families facing problems with medical bills provide additional detail on
how families are forced to make difficult trade-offs with other family necessities,
put off paying other bills, cut down on other expenses and delay getting needed
medical care.

Affordable Medical Care Central to Health Reform

s the national discussion focuses on health care reform
and the expansion of health insurance coverage, policy makers are considering
the important issue of subsidies to make health care more affordable to families.
Affordability has become a major concern because out-of-pocket spending on the
part of families for both health insurance premiums and deductibles, coinsurance
and other cost sharing for medical care has increased at much higher rates than
family incomes.1 The increased financial strain on familiesincluding
many middle-income and insured familiesmeans many families must make difficult
trade-offs with respect to other necessities, as well as increasingly delay
or go without needed medical care to avoid additional expenses.2

There is little consensus among policy makers on how to set affordability
standards in medical care, in part because there is little empirical evidence
to guide these decisions. In addition, most of the policy focus has been on
identifying affordability standards for insurance premiums, such as in the Massachusetts
health reform, with much less attention on affordability standards for out-of-pocket
spending on medical services. Some analysts propose setting affordability standards
based on the current distribution of out-of-pocket spending for services, such
as typical spending levels for a privately insured, middle-income population.3

However, a limitation with this approach is that unlike spending for premiums,
mortgages, rents, and other household necessities, out-of-pocket spending on
medical care is much less predictable, often unexpected and not entirely discretionary.
While families may be able to budget for preventive and routine health care
needs, high out-of-pocket medical spending by families is more often associated
with urgent or serious health conditions, as well as provider recommendations
for treatment, rather than discretionary patient choices. Thus, what people
actually spend out of pocket on medical care reflectsat least in partwhat
they need or are prescribed, not necessarily what they can afford.

This studys primary purpose was to identify the level of out-of-pocket
medical expenses for health services that results in a large number of families
experiencing financial difficulties with medical bills, with a goal of assisting
policy makers in identifying and setting affordability standards for out-of-pocket
spending. The study focuses on out-of-pocket spending for health services, which
has received much less attention than out-of-pocket spending on health insurance
premiums. The studys objectives were to: (1) identify levels of annual
out-of-pocket spending on health services associated with a high proportion
of individuals reporting financial strains arising from medical bills; (2) describe
in depth the difficult choices and trade-offs that families make in trying to
pay their medical bills, as well as the consequences of these trade-offs; and
(3) compare California and the general U.S. population in terms of problems
paying medical bills (see Appendix). The findings are based
on analysis of HSCs 2007 Health Tracking Household Survey, a nationally
representative survey of the U.S. population that also includes a representative
sample of California residents, as well as in-depth interviews of 20 survey
respondents who reported problems paying their medical bills (see Data
Sources).

Financial Pressures from Medical Expenses

revious HSC research has shown that about one in five Americans under
age 65 lived in families that had problems paying medical bills in 2007, a sizeable
increase from one in seven Americans in 2003.4 Follow-up interviews indicated
that medical bill problems result from a variety of situations, including out-of-pocket
spending for a specific surgery or treatment not covered by insurance; medical
services needed during times when the family was uninsured; and the accumulation
of regular ongoing, out-of-pocket medical expenses for insured people with chronic
medical conditions.

Among the 20 percent of the nonelderly population with medical bill problems,
the level of financial strain and medical need varies greatly. Some respondents
reported severe financial pressures resulting from medical bills, often because
they were uninsured or underinsured and have chronic medical conditions that
require ongoing treatment. These individuals continue to accumulate medical
debt that they cant pay off, and they must often choose between needed
medical care and food, rent, transportation costs and other basic necessities.
For example, a 47-year-old married California man accumulated medical debt of
close to $200,000. He lost his part-time job because of illness and city budget
cuts and has limited health benefits (designated as 20% disabled for life)
through Veterans Affairs (VA). His wife is uninsured. The couples outstanding
medical debt increases every month because of medications for the wife and medications
and medical supplies for him that are not covered by his VA benefits. Unable
to pay off their outstanding debt, they are forced to make choices each month
between medical expenses and food, rent and gas.

For other individuals and families, the financial burden of health care is
not quite as serious but still requires difficult choices. These respondents
tended to be working, insured and generally did not have chronic or serious
medical conditions. While they were not accumulating additional medical debt,
ongoing medical expenses prevented them from savingincluding for retirement
or their childrens college expensesand they often used savings,
including retirement accounts, to pay down medical debt or out-of-pocket expenses.
Medical expenses often compelled them to reduce other household expenses, make
lifestyle changes, and forgo or delay routine medical care. Many indicated that
their budgets are so tight that one large or unexpected expense or change in
their situationloss of a job, serious illness or change in insurance coveragewould
put them over the edge into extreme financial trouble.

Modest Out-of-Pocket Expenses Cause Strain

lthough financial difficulties with medical bills are often
associated with out-of-pocket expenses from catastrophic health events, most
people who reported problems paying medical bills had relatively modest levels
of out-of-pocket spending. The 2007 survey data show that about 40 percent of
people with medical bill problems had out-of-pocket expenditures of $500 or
less in the previous year, and 59 percent had out-of-pocket expenditures of
$1,000 or less (see Figure 1). Less than 10 percent of
those with medical bill problems had out-of-pocket expenditures of $5,000 or
more.

Logically, even this small to modest level of out-of-pocket spending is likely
to be a financial hardship for low-income people because it represents a higher
percentage of their discretionary income compared with higher-income people.
Therefore, a more accurate indicator of the financial burden of medical care
relates out-of-pocket spending to family income. Compared with the overall population,
people with medical bill problems were more likely to have high out-of-pocket
expenses relative to family income, although most still had relatively low spending
levels. About half of those with medical bill problems spent 2.5 percent or
less of family income on out-of-pocket medical expenses, and more than two-thirds
spent 5 percent or less (see Figure 2). Only about 10
percent of those with medical bill problems had extremely high levels of out-of-pocket
spending20 percent or more of family income.

The survey findings suggest that many families have very little cushion in
their household budgets for large or unexpected out-of-pocket spending on health
care, a conclusion strongly supported by the in-depth respondent interviews.
Most respondents who werent already in dire financial straits believed
that they are just one adverse eventsuch as a loss of their job or health
insurance or an unexpected illness or accidentaway from financial catastrophe.

For example, a 51-year-old divorced mother of two in Massachusetts was covered
through her employer, and her children were covered through their fathers
employer. Yet, out-of-pocket medical expenses and dental and vision carenot
covered by insurancefor her and her children often push her close to the
financial edge. She worked several part-time jobs to cover her costs and struggles
financially:

Did it (medical debt) put me in the position of losing my house? No,
because it wasnt thousands and thousands and thousands of dollars. But
it definitely put me in a dicey position, and had I been really sick, then we
would have been in real trouble. And I think a lot of people are in that same
boat. Were all one broken leg, one bad fall or one case of pneumonia away
from the house of cards completely falling down.

Another typical situation was a teacher in California, who has three childrenall
with private insurance coverageand earns about $55,000 a year. They have
little discretionary income left each month after mortgage, utility, food, clothing
and transportation payments. While the respondent described his insurance coverage
as pretty good, and it includes some dental and vision coverage,
his medical bill problems resulted from dental work for his children that was
not fully covered by insurance, as well as copayments of about $80 a month for
his prescription drugs for hypertension and high cholesterol. While these expenses
havent caused severe financial problems for the family, they have caused
him to be late occasionally on the mortgage and other bills, to finance some
of his medical expenses on credit cards, and to cut down on other expenses,
such as clothing.

Medical Bill Problems Increase as Out-of-Pocket Spending Rises

deally, affordability standards should take into account the number
of people who experience financial strain at different levels of out-of-pocket
spending. While 20.9 percent of all people under age 65 are in families that
had problems paying medical bills, the proportion with medical bill problems
increases along with the level of out-of-pocket spending.

Most notably, there is a sizeable increase in the rate of medical bill problems
when spending exceeds 2.5 percent of income, from 15.1 percent reporting medical
bill problems when spending is less than 2.5 percent of income to 33 percent
reporting medical bill problems when spending is between 2.5 and 5 percent of
income (see Figure 3). More than half reported medical
bill problems by the time spending reached 7.5 percent to 10 percent of family
income.

Difference by Income

ven when affordability standards directly relate out-of-pocket spending
to family income, low-income families likely experience greater financial strain
at very low levels of spending since they tend to pay a higher percentage of
their income on other necessities and have little or no discretionary income
available for medical care.

Indeed, about one-third of low-income people, those with family incomes below
200 percent of poverty, or $41,300 for a family of four in 2007, reported medical
bill problems at the lowest levels of out-of-pocket spendingless than
2.5 percent of family incomecompared with 16.2 percent for moderate-income
families (200-400 percent of poverty) and 8 percent for higher-income families
(see Table 1). When out-of-pocket spending exceeds 2.5
percent of family income, rates of medical bill problems become more similar
across income levels and are even slightly higher among high-income people when
spending exceeds 7.5 percent of family income.

Many low-income people have difficulty affording even small amounts of out-of-pocket
spending because they have accumulated large medical debts in previous years.
For example, a Texas family with an annual income of $11,000 experienced serious
financial strain almost entirely because of debts incurred several years previously
from the birth of a child$3,500 in anesthesiologist costs not covered
by Medicaidan emergency room visit and a related ambulance charge. Similarly,
a single mother in Pennsylvania on public assistance had accumulated medical
debt of about $10,000, first incurred more than five years ago. Both families
out-of-pocket spending in the year prior to the survey was only $100, but they
both have been unable to make any headway in paying off their debts, resulting
in numerous contacts with collection agencies and severely damaged credit.

Thus, low-income people are likely to view any level of out-of-pocket spending
as unaffordable if they are already burdened with large medical
debt. The survey data confirm that medical bill problems among low-income people
tend to be related to previously accumulated large debts to a higher degree
than other income groups.

Health Status and Chronic Conditions

n general, people in poor health or with multiple chronic
conditions have lower thresholds of affordability compared with healthier people.
About one-third of people in fair or poor health had problems with medical bills
at the lowest level of spendingless than 2.5 percent of income compared
with 12.7 percent of people in good or excellent health (see Table
2). In fact, higher proportions of people in fair or poor health have medical
bill problems at all levels of out-of-pocket spending compared with people in
good health. Similarly, people with chronic conditions are more likely to have
medical bill problems at all levels of out-of-pocket spending compared with
people without chronic conditions (see Table 3).

The in-depth interviews indicated that affordability concerns for people with
chronic conditions and poor health are often compounded by low or limited incomes,
an inability to work, no access to job-based health benefits and large prior
medical debts. Even when they have insurance, patient cost sharing for frequent
office visits, specialists and prescription medications tax limited financial
resources. In some cases, they are simply unable to manage their medical condition
as aggressively as they would like because they cannot afford the medical care
they need. Such a situation can create a perfect storm of financial troubles
that also exacerbate health problems. For example, a 52-year-old Illinois man
accumulated $6,000 in medical debt related to an injury he sustained while on
vacation. He eventually had to quit his job and could not afford the continuation
coverage available through his former employer. He dropped his insurance and
moved in with his mother to cover his other expenses.

Some of the respondents with chronic conditions were disabled and covered
by Medicare but often have medical expenses that are not covered by Medicare.
One 59-year-old woman with multiple chronic conditions received Social Security
disability benefits and Medicare coverage, and her out-of-pocket expenses used
to be paid for by a supplemental assistance program through a local hospital.
However, after the hospital eliminated eligibility for the assistance program
for Medicare patients, she accumulated about $3,000 in debt because of noncovered
expenses. And her debt continued to grow because of her fixed income and ongoing
medical needs.

Financial Consequences of Medical Bill Problems

ll of the 20 people included in the in-depth interviews experienced
some financial consequences as a result of their problems with medical bills.
The severity of the financial problems caused by medical expenses varied, with
the largest distinctions between insured middle-income families and lower-income
families who were uninsured or underinsured.

Although many middle-income families with insurance struggled to balance competing
demands on limited financial resources, they managed to keep on top of medical
expenses and some could make payments to reduce outstanding medical debt. These
respondents were making every attempt to protect their homes, credit and basic
financial stability by going without medical services they couldnt afford,
delaying or making minimum payments on other bills, and cutting back on all
household and personal expenses.

A few respondents reported that they pay off their outstanding medical
debt and medical expenses with credit cards but then cannot afford to pay the
credit card bill. One respondent indicated that he had taken out two loans to
pay off his medical debta home equity loan and a personal loan. Within
a few months, the credit card debt had re-accumulated because he could not afford
the payments. A few respondents reported refinancing their homes to pay medical
expenses. One respondent reported refinancing her home to pay off $10,000 in
medical bills from noncovered outpatient surgerythe insurance company
denied coverage contending the care was for a pre-existing conditionand
she now struggles with the higher mortgage payment.

As mentioned previously, many of the lower-income families that were uninsured
or underinsured had large medical debts from prior years. Most of these respondents
were close to giving up and were not even dealing with the debt on a monthly
basis because they simply couldnt afford to make any payments. For these
respondents, the debt just hangs over their heads, and they are
resigned to a bad credit rating, trying to ignore or avoid collection agenciesand
in a few casesmoving in with family members. These families face extreme
choices between paying for medical care and other basic necessities. One California
woman described the choice as either paying medical expenses or keeping her
children:

I was unable to make the payments (toward medical debt). It was either
you buy groceries and pay rent or you pay the debt. I need a roof over my kids
heads. I need groceries for the refrigerator because here in California,
if you dont have electricity, if you dont have food in the refrigerator
or the cupboard to provide for those kids, social services finds out and they
come and pick up your kids.

Consequences for Health and Medical Care

revious HSC research has shown that the increase in the
proportion of Americans reporting problems paying medical bills was the primary
reason for an increase in insured people delaying or going without needed medical
care in recent years.5

When families face high medical expenses or debt, they often delay or forgo
medical care to avoid incurring additional expenses they cant afford.
Respondents to the in-depth interviews reported delaying or going without routine
or preventive medical care, as well as specialty services, such as mental health
care, physical therapy, pain management, dental care, andfor one respondentnot
participating in a clinical trial for cancer treatment because it was not covered
by insurance.

Dental problems appeared to be common among respondents or family members because
many lacked dental insurance and even those with dental insurance seemed to
view dental care as less important than other priorities when faced with financial
problems. Orthodontic care also posed substantial financial difficulty for many
because of limited coverage. Several respondents reported that their monthly
debt payments increased substantially because of these costs, or they delayed
the care until they could afford it, or they simply had to do without because
they could not afford it.

Financial difficulties with medical bills resulted in high levels of psychological
stress for some respondents, although the financial problems that caused the
stress also prevented them from seeking treatment. Other respondents with health
problems reported that cutting back on health care was negatively affecting
their health and, in some cases, their ability to work and perform other activities
of daily living.

For example, an uninsured woman could not afford all of the medications needed
to treat her chronic conditions because of her medical debt. The irony is that
while large debt created barriers to adequate treatment for her health problems,
these same problems were preventing her from re-entering the workforce, which
would have increased her income and enabled her to start paying off her debts.

By me being on a fixed income, I have to live on a certain amount
of money Im falling farther into debt and I have medical problems
on top of that. I do want to go back to work but I was trying to get my medical
problems taken care of first. I want to pay them (medical bills), but I cant
pay them until I go back to work. But if I go get a job and then Ive got
to go to a doctor four times or five times out of a month some jobs dont
want you to come to work with medical problems. I probably wouldnt get
the job anyway.

Underscoring the importance of both informal support from providers and the
health care safety net, some respondents reported that they received help from
the medical community through reduced or waived fees, lenient payment arrangements
and, in a few cases, health care providers even making house calls. Some respondents
also reported turning to free clinics and other providers that charge fees based
on a sliding scale to obtain more affordable care, including county health departments
and other publicly sponsored clinics, university clinics for dental care, and
discount stores for eye exams.

Changes in Insurance Affect Financial Burden

or many respondents, changes in health insurance coverage resulted
in big changes in the familys financial situation, both positive and negative.
Sometimes gaining insurance coverage or changing to an insurance plan with lower
cost sharing provided families the boost needed to get out of debt or manage
their medical expenses. For example, one family was able to change to an insurance
plan with much lower deductibles and cost sharing through the wifes workplace,
which she became eligible for by increasing the number of hours she worked.
This change provided enough of a cushion to allow them to start paying off their
debt:

It was a huge blessing to go on my insurance. With his (husbands)
insurance there was a $5,000 deductible, which killed us. Its a good thing
we switched to my insurance because if that (last four years of medical problems)
had been on his (insurance)$5,000 deductible each year and I went through
it for four yearswe would really be in trouble. If we had not been able
to switch insurance, we wouldnt have been able to pay off the debt.

On the negative side, the loss of insurance or an increase in cost sharing
can sometimes push a family that was just getting by financially into a completely
untenable financial situation.

Economic Downturn and Medical Care Affordability

he survey datacollected between April 2007 and January 2008predated
the economic downturn, mortgage and financial crisis, high fuel costs and other
inflation that has occurred in 2008 and, therefore, likely understates both
the extent and severity of medical bill problems that families are currently
experiencing.

All of the respondents to the in-depth interviewsconducted in September
2008reported feeling the effects of the worsening economy over the past
year, especially the increase in fuel costs. In general, as expenses related
to fuel, food and other necessities increased, families struggled harder to
meet out-of-pocket medical expenses and pay off medical debt. In many cases,
they delayed or went without medical care to offset other expenses. Virtually
all respondents were cutting back on expenses in some way and reducing savings.
There were also some indications that higher fuel costs were increasing barriers
to care, especially for people in rural areas or small towns with limited medical
facilities. For example, one person who receives care at a VA facility 90 miles
from her home had to cancel appointments because she couldnt afford to
pay for gas.

Health Reform Implications

he findings from both the survey data and the in-depth interviews
indicate that families have very little cushion in their household budgets to
incur large out-of-pocket medical expenses. Overall, more families experience
serious financial problems with medical bills when out-of-pocket medical spending
exceeds 2.5 percent of family income. However, even this level of out-of-pocket
spending is likely to be unaffordable for many low-income familiesespecially
those with significant medical needswith substantial medical debt. Because
of their precarious financial situation and limited incomesoften made
worse by illness and medical debtcaution is in order before imposing even
minimal cost sharing on low-income families.

Of course, determining the affordability threshold for out-of-pocket medical
spending must be done within a context of affordability standards for health
insurance premium payments. Health plans and policy makers may choose to keep
patient cost sharing for services low in part by charging higher premiums. This
may be a particularly attractive option for people with significant medical
needs who prefer more predictable monthly premium paymentseven if financially
stressfulthan much less predictable out-of-pocket costs for care. Alternatively,
enrollees who pay lower premiums may be able to afford somewhat higher cost-sharing
thresholds for services. It was beyond the scope of this study to explore the
appropriate mix of out-of-pocket spending for premiums and services.

What do these affordability standards imply in terms of current cost-sharing
requirements in employer-sponsored health plans? Recent employer surveys show
that cost-sharing requirements in the form of deductibles and copayments have
been increasing in recent years.6 About 80 percent of plans also have out-of-pocket
maximums, beyond which enrollees are not expected to pay any of the costs for
covered medical services, but the limits typically dont apply to prescription
drugs. For plans with out-of-pocket maximums, the median amount in 2008 was
$2,000 for single coverage and $4,000 for family coverage. To fall below the
threshold of 2.5 percent of family income, families meeting or exceeding these
out-of-pocket maximums would require an annual income of $80,000 for single
coveragemore than seven times the poverty level for a single personand
$160,000 for family coveragemore than seven times the poverty level for
a family of four.

In terms of what people with employer-sponsored coverage are actually spending
out of pocket for services, 22.3 percent currently spend more than 2.5 percent
of family income (see Figure 4). However, this varies
considerably by family income, ranging from about half of people below the federal
poverty level spending more than 2.5 percent of family income to only 12.5 percent
at income levels of 600 percent of poverty or higher. Thus, setting cost-sharing
affordability standards at 2.5 percent of family income or lower for employer-sponsored
plans would by far have the largest impact on low-income families.

Most health reform plans focus on the affordability of health insurance premiums,
with the amount of premium subsidies based directly on family income. There
has been much less attention concerning affordability of out-of-pocket expenditures
for services. One exception is the Commonwealth Care program in Massachusetts,
part of the 2006 state health reform legislation, that provides subsidized insurance
for low- and moderate-income peopleup to 300 percent of the federal poverty
level. In addition to premium amounts based on family income, cost sharing for
services and out-of-pocket limits also vary by family income, with very little
or no cost sharing required for people with family incomes below the federal
poverty level. However, cost-sharing limits are based on broad income categoriesrather
than defined as a share of family income. As currently structured, the financial
burden of out-of-pocket expenses can vary considerably depending on whether
one is at the lower or higher end of an income group.

Medicaid and the State Childrens Health Insurance Program (SCHIP) probably
have gone the farthest in terms of limiting all out-of-pocket spendingpremium
contribution and patient cost sharingto a percentage of family income.
While states have considerable flexibility in requiring premium contributions
and patient cost sharing, total out-of-pocket spending cannot exceed 5 percent
of family income for enrollees earning 150 percent of the federal poverty level
or more. The findings in this report suggest that this threshold of out-of-pocket
spending may be too high for low-income persons, and research has indicated
that such cost sharing in Medicaid and SCHIP tends to discourage enrollment.7

The decreasing affordability of health care for families is directly related
to the more general trend of overall health care costs increasing much faster
than gross domestic product (GDP) and family incomes since the late 1990s.8
In the early and mid-1990s, the nation experienced a brief period of relatively
slow growth in health care costs largely because of the rise of tightly managed
care, which contained health care costs through greater restrictions on service
use and enrollee choice of providers. However, the most highly restrictive forms
of managed care were broadly rejected and there has been little effective constraint
on health care costs over the past decade other than increased patient cost
sharing. Increased financial responsibility for health care costs on the part
of patients, including the promotion of consumer-directed health plans, is currently
the primary method being used to contain health care costs.

Given that most families have a decreasing ability to take on more financial
responsibility for their health care, is the nation ready to return to more
tightly managed care as a way to contain and lower health care costs for families?
The survey data suggest a mixed picture. In response to a question about whether
they would be willing to accept a limited choice of physicians and hospitals
if I could save money on my out-of-pocket costs for health care, people
with medical bill problems were more likely to strongly agree with
the statement (32.7%) compared with people without medical bill problems (20.8
%) (see Table 4). On the other hand, different attitudes
between people with and without medical bill problems on the choice-cost
trade-offas well as differences among people at different income levelsare
not as great as one might expect, suggesting that a return to health plans that
limit patient choice would not be enthusiastically embraced by much of the population.

Nevertheless, there are few other options in the immediate future to relieve
the financial pressure on families. Achieving affordability thresholds of 2.5
percent of family income would likely require additional subsidies or expenditures
on the part of private and public purchasers of coverage. This is likely to
be unsustainable at a time when annual health care spending continues to exceed
growth in GDP by a wideand increasingmargin as the economy declines.
Moreover, the economic downturn and financial crisis are putting considerable
pressure on state and federal budgets, as well as corporate bottom lines. Reducing
or removing cost constraints on families without any system-wide effort to contain
costs would only worsen the current problems. Ultimately, an important part
of the solution is the ability to distinguish between high-value health carecare
that is effective and should be coveredand health care services that are
ineffective and wasteful. Such efforts, however, are in the early stages of
development and will not provide immediate relief to families.

Data Source

The survey data used in this report are from HSCs 2007 Health Tracking
Household Survey, a nationally representative telephone survey of the U.S. population
conducted between April 2007 and January 2008. The sample includes about 18,000
people, and the response rate was 43 percent. The sample for this study was
all people under age 65, or about 14,500 people. Population weights adjust for
probability of selection and differences in nonresponse based on age, sex, race/ethnicity
and education. Standard errors account for the complex sample design of the
survey.

The survey also includes a representative sample of about 1,600 people
in California, including about 1,400 persons under age 65. Survey weights for
the California sample were designed to reflect population totals for the state
and also adjust for differences in nonresponse based on age, sex, race/ethnicity
and education.

The survey asked the question, During the past 12 months have you
or your family had any problems paying medical bills? The survey also
asked about total family out-of-pocket expenditures for medical services in
the year prior to the survey. This report takes the perspective that it is more
appropriate to observe medical bill problems at the family level because decisions
on major expenses and financesincluding medical careare usually
made at the family level. This also implies that the negative effects of medical
bill problems in the family will affect all family members, rather than just
the individual(s) within the family who incurred the medical bills. For this
reason, the response to the questions on medical bill problems and out-of-pocket
expendituresasked only once per familyare applied to all persons
in the family. The estimates reflect the percentage of people in families with
medical bill problems and/or at a given level of out-of-pocket spending.

In September 2008, 20 in-depth interviews were completed with respondents
from the 2007 Health Tracking Household Survey who reported problems paying
medical bills (based on the survey question); five interviews with respondents
in California and 15 with respondents in the remainder of the United States.
While not statistically representative, the sample of respondents for the in-depth
interviews was selected to reflect a broad cross-section of individuals based
on their insurance coverage, socioeconomic status, family type, race/ethnicity,
severity of medical bill problems (based on total medical debt at the time of
the survey), and region of the country. The interviews were open-ended and semi-structured
and were guided by the use of interview protocols.

Funding Acknowledgement:

This research was funded by the Blue Shield of California Foundation. The HSC
2007 Health Tracking Household Survey used for the analysis was sponsored by
the Robert Wood Johnson Foundation.

Appendix - A Comparison of California and the United States

While many California families are shouldering a difficult burden of out-of-pocket
medical costs, the problem looks different in the nations largest statefor
a wide range of reasons. A smaller percentage of nonelderly Californians reported
problems paying medical bills compared with the U.S. population13.5 percent
with medical bill problems in California compared with 20.9 percent nationally
(see Appendix Table). Most of the difference in
the prevalence of medical bill problems occurs at lower levels of spending:
7.7 percent of Californians who spent less than 2.5 percent of income had medical
bill problems, compared with 15.1 percent of all Americans. When out-of-pocket
spending exceeds 5 percent of family income, prevalence of medical bill problems
is comparable between California and the total United States.

Fewer medical bill problems in California likely reflect the fact that average
annual out-of-pocket spending for medical services is lower in California ($977)
compared with the overall U.S. population ($1,160). Lower out-of-pocket spending
in California is consistent with the fact that total per capita health spending
in California tends to be lower than the U.S. average$4,638 per capita
in California vs. $5,283 for the nation in 2004according to the Centers
for Medicare and Medicaid Services, National Health Accounts.

Lower spending in California reflects a number of factors, including a higher
percentage of insured persons enrolled in health maintenance organizations (HMOs)
(47% in California vs. 36% nationally). Compared with preferred provider organizations,
for example, HMOs generally have less patient cost sharing.

Also, California has a number of population characteristics that are associated
with lower health care use and less health spending. For example, California
has a somewhat higher percentage of uninsured (19%) compared with to the overall
U.S. population (16%). Uninsured people use fewer services because of financial
barriers to care and, therefore, incur fewer expenses relative to insured people.
In addition, California has a much higher percentage of Hispanics (39%), which
is more than double that of the general U.S. population, as well as a higher
percentage of recent immigrants. Overall, recent Hispanic immigrants use less
health care and incur fewer out-of-pocket expenses, even after accounting for
differences in health insurance coverage and income. Other than financial barriers
to care, Hispanics often encounter access barriers because of language and immigration
status. Lower health care use among recent immigrants reflects in part that
they tend to be healthier, but also are less acculturated into U.S. society
and less familiar with the health care system, predisposing them to use less
care.

Nevertheless, the experiences of Californians with problems paying medical bills
are similar to the nation in general. Five of the 20 in-depth interviews were
conducted with respondents from California who varied by age, gender and race/ethnicity,
as well as their financial and health care circumstances.

Three of the respondents reported extreme financial difficulties because of
medical expenses, limited income, limited or no health insurance coverage, and
chronic conditions or serious medical problems:

A 35-year-old single woman with two teen-agers indicated that her debt of $10,000
resulted from emergency room visits a few years ago for her daughter. She is
currently insured through her employer but cannot afford to cover the children,
and her income is too low for her to pay anything toward her debt. She feels
her choice is to provide for her children (to avoid their removal by social
services) or make payments on her medical debt.

A 47-year-old married man who is on disability and has limited health insurance
benefits through the VA reported medical debt of close to $200,000. He has accumulated
this level of debt because of his low income, his chronic conditions and his
wifes lack of insurance. Although he tries to make payments, he continues
to incur additional debt and is forced to choose each month among food, rent,
gas and medical expenses.

A 43-year-old married man with three children is on disability. His wife works
and is insured through her employer, but he and the children are uninsured.
He cannot afford routine/preventive care for himself or the children and has
outstanding debt he is trying to pay off. He declared bankruptcy several years
ago (not because of medical debt) and is still struggling financially.

The remaining two respondents reported less dire but still fairly serious financial
difficulties. For these respondents with income and insurance, financial problems
resulted from large medical debt or out-of-pocket costs for noncovered care.
Keeping up with these expenses and/or making payments on outstanding debt creates
financial difficulty for these families and often forces them to delay or forgo
some routine/preventive medical care:

A 50-year old-single man with three children has insurance through his job
and no one in his family has a serious chronic illness or medical problem, although
he takes medications for hypertension and high cholesterol. The children need
routine/preventive care, dental work, vision care, and braces and handling these
expenses (copayments, premiums and noncovered expenses) has pushed him into
medical debt.

A 34-year-old married woman with one child has thousands of dollars in debt
from the birth of her child. They were managing financially until they found
out that the only hospital in their town no longer accepts their insurance.
The hospital has presented them with bills for the hospital and anesthesiologist
from the birth even though they were insured at the time. She is making payments
on her debt (sometimes on a credit card) and does not have other serious financial
problems. She works part time and her husband works full time and the family
does not have any chronic conditions.